Tobacco Straten Review Team
A meeting of the Tobacco Strategy Review Team was held an 3 Oth November
1990
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Present: Mr. P. Sheehy, Mr. M.F. Broughton, Mr. 3-D. Brmley,
I
Mr. &.J. Pritchard, Mr. U. Harter, Mr. P.J. Rombaut,
Mr. J-L. Mercier, Dr. R. Salter (Secretary)
Mr. A.L. Heard attended for items 35-51.
1. The minutes of the meeting held an 17 th September tore agreed.
2. Intar-Company Transfers : It was noted that opportunities to
broaden managers' experience and to transfer expertise through
movements of staff between Group companies were being pursued
actively. A meeting to review existing secoudment2 and to review
progress an the identification of new opport=iries and new candidates
will be arranged by Mr. Bramley in 2ld-1991. The results of these
reviews will be reported to the team La September 1991.
3. Representation In overseas; Markets : It was noted that in Maus
markets where more than one Group company was represented,
insufficient advantage was being taken of opportunities to reduce
costs and Improve efficiency by sharing office facilities, market
information, market research, etc. It was agreed that Mr. Brimalay,
Mr. Pritchard and Mr. Barter would review the arrangements for chair
overseas representation end would report back to the next meeting on
specific action being taken to Improve co-ordi:uatiou.
4. US International Brands; : Mr. Pritchar d reported that sales of
US rB for the year would show a significant (132) increase on 1989.
The rate of increase in the second half of 1990 would be lass than in
the early part of the year but the" were specific factors explaining
this (e.g. the r-4-2 of the c2duese Now Year; of launches In Japan;
and of the opening of East European markets). Thus, it did not
represent a slackening in the underlying 4unentum. of growth in. uS
International Iran". Brown 4 Williansom were committed to the
objective of achieving 15% pa. volume growth through Identifying and
fully exploiting market opportunities as these aroma, worldwide..
S. For Zane, it was noted chat a first evaluation of the Total Offer
tests in Eucope would be made in aid-December. Assuming that this
evaluation above encouraging ramIts, test markets are planned for-
1991 with a pan-European launch in 1992. It was also noted that tha.
launch In Brazil bad been brought-'forward from .1992 to M.
6. Lw.ky Stz-Mm Lights was considered to have.'& go" growth potautl&L
and would be available in 15 countries in: 1991. -A possible launch in
Venezuela was being comaidared and Lucky Strike was making good
progress in Brazil. Prospects in Europe were considered to be
particularly good with. sLVdf:Lcant progress in Germany and launches
planned in the Netherlands and Beilgium. The Chairman undarlin" the
importance of =rating a really effective role* drive for this bra",
commensurate Ath its nciting prospects in the market. It was also
important that the guidance on pricing and on blends was followed In
each market to ensure the right- positioning relative to Marlboro.
Mr. Bzmley was asked, to review the blends, pricing and distribution CD
in Spain and to report back to the next a"ting on action taken co
improve quality, raise prices and strengthen distribution La this co
market. N)
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S. The Chairman stressed the importance of conforming to the approved
blends for Kent and Lucky Strike worldwide and asked for reports for
those markets where other blends were being used, outlining action La
hand to change to the approved recipes.
9. For Barclay, it was agreed that it would be critical to avoid
damaging the image of Barr-lay as combining full flavour with low
deliveries. It was important, therefore, to be in a position to
launch Barclay Ultra Lights (2mg) ahead of any change in the tar
rating of the existing product. Revised strategies should be
considered for those markets where it had been intended to launch a
5ag raced product ahead of the 2mg version. The revised strategies
for 'Barclay vill be reviewed at the next meeting.
10. it was agreed that Capri and other superslia products would
continue to be significant as niche products but, in future, progress
should be reviewed at 6 monthly intervals rather than quarterly.
II. it was noted that Viceroy and Zool, continued to be progressive
in selected markets and it was suggested that further consideration
should be given to the potential for expanding sales of Menthol
cigarettes in the A.frica/Middle East -region.
12. 'Et was noted that Pall U-11 was important as a leading lov-priced
brand for Eastern Europe and for Carmmy. The Chairman stressed that
it vas Important for the brand amer to control the blends. However,
provided this was done, the markets should be supplied from the lowest
cost source, subject to three further condition that the business must
be profitable on a full cost rather than a marginal basis. Specific
consideration should be given to supplying Pall Mall from Brazil.
Details of the bland to be used will be supplied by Mr. Pritchard.
13. The 1991 PLans for the major as ratersational, Brenda win be
reviewed at the no= neaciug. In addition, Mr. Pritchard will also
provide a note explaining the differences between the methods used to
calculate the figures for US International Brands as presented by
Brown & Willimmaon and UTCo- respectively.
14. UK International Brands : Mr. Bromley reported that although
domestic sales of UK International Brands, &part from Players Gold
Leaf (?CIL), were static or declining, export sales of SE 553 and PGL
were progressive and the declines in Benson S ledges and JPS appeared
to hove been halted. Overall, sales of UX International Brands were
continuing to expand.
IS. Tar Bosom & ledges, it was noted that there ha been good
progress in France (0.9% market share) and the position in goat Africa
appeared to have stabilized. The evaluation of the potential for
launching a Benson & Sedges American Lights had not been encoisraging
but was being looked at again in the context of the )ftlaysian market.
16. State 1xprema continued to do mail In the Tar Best. There me
need to redesign the park for the Low Tar varLants but It was agreed
that the brand Image was sufficiently strong to allow considerable-
latItWe La desip.
..17.' Smoking QuaUty was,& continuing concern and it was agreed that in Pi
order to maintain the image of the International: Brands, it was
Laportauz that thazZ were based on International blends. Every effort
should be made to negotiate an end to any restrictions (*.S. in Spain
and Malaysia) requiring the use of local Ulf .
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18. Eastern Europe : 4r. Harter reported that even excluding East
Germany, which is now part of the German domestic market, 1990 sales
to Eastern Europa up to the and of October ware 2.5 billion, which was
over 50% ahead of the corresponding period in 198 9. However, market
conditions were becoming more difficult due to political =certainties
and a worsening economic situation. tt was also noted that Philip
Morris was still more successful in penetrating the markets and in
expanding sales to duty free and hard currency outlets.
19. The USSL was being visited during the week and one purpose of the
visit will be co set up the Moscow office. rho Group had already
established a range of contacts in the USS11 and in addition to offers
to the Central Import Agency, enquiries were also being received froa
traders who were believed to be supplying the market through
councer-trada arrangements.
20. In Poland, increased taxes and punitive duties on Imports were
severely restricting business, especially in the hard currency
outlets. Although there were some opportunities for Imports from
Brazil (which attacted lower rates of import duty). longer term
expansion was likely to depend an manufacturing in Poland.
21. Mr. Herter bad had talks with the works council of a factory in Poland
which could be privacised and the next stage would be to ound a formal
proposal for a joint venture. Although the factory vas smaller than
the two leading manufacturing plants (which are in negatiatiou'vith
Philip Morris and RJL), it appears to be reasonably of f Icient and has
room for expansion. Tf the Group. proposal ware. to bo accepted. the
likely level of investment would be around L4.5 million, which might
be in the form of machinery.
22. The Chairzan suggested that it would be helpful for Mr. Herter to seek
assistance from a company in London which me knamn to the Group and
which bad experience of negottatIng joint venture arrm*@ts La
Poland. Mr. Barter said be would do this abead of sending the
proposed letter of intent to the Polish Minister for Foreign
Imas -in C. In addition, it mm noted that the Group should -also be
prepared to advise the Polish Government on excise structures, which
appeared to be rudimentary at present.
23. Rmagary : Mr. Brauley reported that a proposal for an investment
in a factory at Fees In Hungary me currently being considered by the
State Property Agency. Although their response on this had been
delayed, it was expected within the next few days. However, the -
change of Pinance Minister in Hungary might cause a further delay.
24. Bulgaria : Following a -visit to ewaLuata 3 factories in Da;garia
as potential investments, It mm intended t.6 "ad 4 letter of Intent
which Mr. Vatterton hoped to discuss with the.ftlgarian authorities La
January. Mr. Wattertan would ala'o -seek, to Identify *sport
opportunities during his visit.
25. Leaf Advinery Tom : Mr Bruslay reported that tba Leaf Advisory
Tom ha been set up along the lines previously agreed and the tam
plumed to Visit Hungaryj Poland and Bulgaria during January. It was
hoped that by, April next year, tha tam would be in a position to
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provide useful advice on Leaf growing In emb of these countries.
26. Vista= : Mr. Brazley reported that Mr. Watterton had visited
Vista= ana would return in January for further discussions on the cc
potential for investment there. In the meantime, it was thought that
there could be -opportunities to promote exports of SE 555. co
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2'. I--- : UTCo - had sent in an adviser to help the Burmese
Government set up an excise structure. Although Immediate
opportunitites for increased trade or investment appeared to be
limited, contacts with this market would be maintained.
28. SUTL : It was noted that BAT had been wall known in Vietnam and
Burma through SUTL and the Chairman suggested that a formal agreement
with SUTL might be considered as a possible way to build on these
contacts.
Z9. Mexico : Mr. Bramlay reported that the Group's brands had been
registered in Mexico and an Import licence had been applied for. The
potential for setting up a secondary manufacturing plant was also
under investigation. Attempts were being made to buy back the rights
to the Viceroy trademark but the current owners were resistant and no
progress had been made an this.
30. Turkay Mr. Br- anley reported that a meeting would be held early
in December to progress the negotiations an a potential Investment in
Turkey. This project bad 'now been handed over to Mr. Watterton and
his tem.
31. Brazilian Exports : It was noted that following a significant
increase in 1990, the target for exports from' Brazil In 1991 would be
3 billion, w1hich van over double the volume achieved in 1989. The
Chair--- stressed the importance of upgrading the staffing and
expertise in thin activity and it sea noted that Souza Cruz are
obtaining help from Brown 6 W=amaon in this respect. It was asked
that Souza Cruz should report progress at the next mating,
considering the price and profitability of exports an we.1.1 as the
volume.
32. X-facturIng Capacity : 7olloving discussion of an Initial iturvey
of the present and potential u9scity of the Group's main
acturing facilities, it we suggested that further work was
required both to establish where shortfalls might occur and also to@
establish where there mm a potential for expansion to. Improve the
overall productivity, cost-effectiveness and ta3r-efficiancy in
13 sourcing the Group's marl-ts.
33. It us& agreed that Mr. Kobaborst should be asked to arrange a meeting
of the Group's production directors end that he should produce a . .-
review for the May meeting of the toam; showing the curventl* pl
capacity and output of the Group's manufacturing.facilities,-.
potential problems; and. considering options for specUtc
expansions to provide c=a capacity and opporcomitiia for mace
cost-effective and taz-offLelent ways for meeting overall Group
demand.
34. The ChaUmm noted that Mr. Bannister at RL= had produced a good
appraisal of the potential for expanding Southampton and suggested
that it would be helpful for a similar appeals to " carried act for
Bayreuth. Be also stressed the need for each company to sea=* that
sac Li would be available to met planned ezWsion and
refurbishment up to 1995 and it was suggested that Souza Cruz should
also contact machinery.amufacturers to try to encourage Improved'
availability in Brazil of the equipment which Vs needed to update cc
their manufacturing facilities. P...)
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35. FuDdeROUtAl research Programme : Introducing the proposed progr
for Fundamental Research, 4r. Reard said thee there had been a change of
emphasis with greater priority now being given to providing the
scientific basis for improved product design. As a result, less priority,
was being given to regulatory issues and to' speculative work on
innovative products. The proposed allocation of ef fort was:-
(a) Smoke Quality Improvement 35Z
(b) Innovative Froduc:s 202
(c) Regulatory Issues 28Z
(d) Environmental Issues 17Z
36. After discussion, it was agreed that the proposed allocation of effort
and the total budget of 0.865 zillion plus LO. 29 6 million for the
Scientific Research Group projects were acceptable. The proposals for
the contributions from each company to funding the programs was noted
but before agreeing these it was asked that there should be a further
check by Mr. Broughton to ensure that the allocations are nade in the
most tax-efficient way.
37. Biological Activity : A specific iev of the A@-
research programme was the Group
activity, 4and
to the Ames test. It was noted
testing I r
a rl- @..
prod., .48 b .tW&ft.Ztty-MC2VO. Wu urge
.CAC &M. _. -.b-. - -ml to-toov*de *uf&vm*t*o*-*s bw Po'
use tests of this trw may chacwterise Group proftets.noid Itamor
Ka" eka-M bhoMhis does not Imply acceptance of the validity of
tests. 2"0-:06 Aft-
Technical Liaison : Reviewing the current arrangements for technical
10 liaison, it was noted that the Interchange of information on J&D and
product development appeared to be working wall but there we lass
confidence in the effectiveness in sharing Information and expertise on
manufacturing processes.
39. It was agreed that, wherever possible, technical Uaisom should be on an
ad hoc basis and regular liaison meetings should be avoided. It was also
suggested that it was better for the parson-responsibla for an activity
to be Involved directly rather than having one parman responsible for - '
li&L&on aver a rang* of subjects. While it was accepted 'that secoadments
were & very af factive sessa for sharing experience in depth. the" should
be restricted to @saw where there was & specific purpom related dither
to the transfer of specific expertise at to uanWr development.-
40. The Chairman asked Mr. Brmlay to arrange for a Paper to be presented to
the next meting, detailing the technical Liaison matings which had
occurred in 1989 and 1990, showing the location of each ad the
the pe*pL* who had attended. Based an this. the tam would then
to dec1de whether there v" a casoa for reduclug the uum4sr of as
and whether the attanda=a at future meetings ought to Lavolve a
Spectrum of people.
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41. regulatory looms - Smoking an Aircraft : Mr. Bramley introduced a
paper suggesting approaches which Group companies might take when faced
with the possibility of airlines introducing bans on smoking. It was
agreed that the paper would be useful as general guidance for use by
individual companies and should be made available to them for use in this
way. It was also suggested that an additional point to be made was that
the airlines gained from smoking bans through reduced administrative and
cleaning costs. Hence they would not be judging the issue entirely from
their customers' point of view.
42. US Environmental Protection Agency : IC was noted that the Us
Environmental Protection Agency had produced two draft reports on He ALl
Effects of Passive Smoking and EnvLrousental Tobacco Smoke in Workplaces.
Mr. Pritchard reported that t@ese were now being considered by the
Government's Scientific Advisory Board (SA3) . He will report the
reactions of the SAB at the next meeting.
43. Sidentrwm Smoke : Objectives for reducing Sici smoke will be
reviewed in February 1991.
44. Smoking Coupeadiums : It was noted that the Smoking and Neal th
Compendiums will be reviewed and updated La January 1991.
45. The Additives logistar will be completed in the first quarter of
1991.
46. Green Issues : It was noted that the main issue likely to be. of
significance to the Group was the attitude to packaging and the related
work in the European Commission which could la" to a Directive, basaa on
proposed German legislation, to Oaks retailers responsible for the
collection of packaging used an products which they sell. It mm agreed
that developments in attitudes to packaging would be a key issue to be
monitored by the Group.
47. Valdez Marter : It mm noted that there was increasing pressure In
the USA for major companies to sign am eavircomental charter based aj the
'Valdez Principles'. The Secretiry was asked to report back on the
possible significance of this to B.A..T Industries.
48. Prod--- --rorporatln T-1 Tobacco : Xr. Pritchard re-ported that
products incorporating T-1 Tobacco were undergoing tests, the results of
which would be reported at the next mating. Mr. Mortar reported that
tests of BATCY products ware due ii:L 1991 and BATCo. also reported that
Y-1 was being evaluated.
49. The Ue=Aora R-zbdbook bad been completed and Mr. Pritchard would
Arrange for this to be circulated throughout the Group. Tbm handboo
jL
would be treated as a high security document and this would be reflected
In the way in which it was distributed and subsequently Sold.
50- Amu" Tochimalogy - Decomposition Products It was reported that
the project to charactarlso the decomposition products of cigarettes
coutaLul:4 maracial* subjected to amRMLL& treatment in due for completion
by aid-1991. Results of tests to date have not Sim caw* for caucus.
51. Use of lecowtituted Stem : it was agreed that tba project to
evaluate the benefits of Incorporating stan in the form of reconstituted CD
sheet should be completed as soon as possible. Assuming that this above
that the use of sheet Ls beneficial, plans should be prejared for mating
the requirement for sheet La Europe,. drawing an the expecience. of Brown
Williamson who have sheet made for them by Klabarly Clark. co
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52. Leaf Supplies : It was acted that reviews of the likely
availability of tobacco in L991-1992 had suggested that shortages
could develop, especially in Burley. It was agreed that &II companies
should ensure that by the end of 1990, orders have been placed
sufficient to cover the total requirement for 1991. If there are any
shortfalls, action should be put in hand immediately to expand
supplies within the Group (a.$. in Brazil and Nicaragua).
53. Grade Rationalization : It was noted that the working of the !&of
Grade rationalisation scheme was due for review in May 1991.
54. Current Trading : Reviewing the results for the Group's tobacco
businesses up to the end of the third quarter, M. Broughton draw
attention to the increase in volume which, for the full year, was
expected to be 14 billion higher than in L989. despite an assumed 3
billion reduction in trade loading in the USA. Trading profits were
also expected to show an increase compared with 1959 despite an
adverse movement in exchange rates.
55. It was noted that BAZU. ware hoping to meet their budget for the
year despite adverse effects due to exchange rate movements and an
economic downturn in Africa. Sp&4 bad performed bettor than
agpected. Marker share and profits bad increased in India in local
currency but this had been offset by the devaluation of the ILupe*.
56. Brown & WiLl1amsou were also hoping to meet their profits budget
but volume could be slightly below budget. The results ware adversely
affected by the expected intention of Philip Harris to increase trade
loading as the pressure $rowe for their tobacco businesses to
compensate for reduced growth in their food businesses.
57- BATCY profits before tax were MS million below budget at the and
of the 3rd Quarter but were expected to seat the budget for the full
year.
58. Sousa Crux was expecting to achieve a market share of SIX for the-
full year bar ttare would be a negative variance au profits due to
price controls au cigarettes and the adverse effect of an overvalued
Cruzeiro on TAaf exports. The current fraud was for the Crumalro to -
devalue which would be good for exports but would have an adverse
effect au the translation of profits.
59. Imperiall's market share hod L=reassd to 6OZ and Opoirating Profits'
were expected to be Can$II million better than budget. Nowever,
industry-volmes were down 4.5Z on the year and this trand was'
4.
expected to continue.
6D. Management Davelopmest Mr.' Broughton reported that the project
to review the arrangements for anziag@nt training and development bad
been set-up pad would bi- co-ordinated -by Mr - Raftath., Tbar'naln purr
of On'work would be-carried out by two secoudess, one frm Tobawo
and -on* from Financial Services but it was also intended to use
consultants tar collect data an current practLeas both within UT and
in other campan4s.
61. It VMS noted that it maw likely that the consultant to be used would
be Bill taldlaw. who had worked for lotbeaus and was now a par- in
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Hossic, a small independent consulting firm specialising In this
field.
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62. It was agreed that the person seconded to the project should be a high
potential manager in 30-40 age group and should preferably not be a
personnel specialist. A specific nomination was made which will be
folloved-up by Mr. Broughton.
63. The Chairsan asked that the team should be provided with progress
reports as the project developed.
64. Marketing Directors Seminar : The Chairman thanked the members of
the tomm for their suggestions for issues which aiShc be considered by
a future marketing directors' seminar. The arrangements for this
sem.1-ar, will now be progressed from the Contra.
65. Datas of fttw* Meetings Meetings in 1991 will take place on
Wednesday. 27th February-, Th ur 30th May; Friday, fith September;
and Monday, 2ud Decombei.
RS/DJA
7th Dacmber 1990
A
OD
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BAT Industries document for Province of British Columbia 22 April 1999